CFA Level I · CFA Level I Exam · Fixed-Income Securitization
Relative to a pass-through security, a planned amortization class (PAC) tranche in a collateralized mortgage obligation is most likely to have:
A PAC tranche is protected from both contraction and extension risk as long as actual prepayments stay within its established band, since support tranches absorb the variation. This makes its cash flows more predictable than those of a pass-through.
- Agreater prepayment uncertainty, because it absorbs all prepayments
- Bprotection from contraction and extension risk within a prepayment bandCorrect
- Cno exposure to prepayment, because it holds only interest payments
Explanation
A PAC has a schedule of principal payments that is maintained as long as prepayments stay within the initial band, because support tranches absorb the excess or shortfall. It is not immune outside the band, and it does not hold only interest.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Securitization shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Securitization questions
- A bank transfers a pool of auto loans to a special purpose entity that issues bonds backed by the loans. The legal feature of this structure…
- A CMO with a floating-rate tranche and an inverse floater tranche is created from a fixed-rate collateral pool. The structure most likely al…
- In a CMBS structure, an investor holds a tranche with a high credit rating. The credit enhancement that most likely protects this tranche fr…
- A planned amortization class (PAC) tranche is created within a CMO. The support tranches most likely provide protection to the PAC tranche b…
- In a jurisdiction where residential mortgages are non-recourse, a borrower defaults on a loan with an outstanding balance of 300,000 secured…
- In an ABS structure, the originator sells receivables to a special purpose entity that issues a senior tranche and a subordinated tranche. L…